MIT Sloan Management Review

Service and Quality

Applying Cost of Quality to a Service Business

By Lawrence P. Carr

July 15, 1992

XEROX RECEIVED THE MALCOLM BALDRIGE QUALITY AWARD IN 1989 FOR ITS MANUFACTURLNG OPERATIONS. A KEY ELEMENT IN ITS PROGRAM WAS INSTITUTING a system of quality cost measures. The system helped managers determine the costs of activities such as inspecting products, making excessive engineering changes, doing rework, and repairing substandard equipment. But when it was time for the company’s U.S. marketing division to join the quality bandwagon, managers had to come up with whole new definitions and measurements. This article explains how they adapted cost of quality concepts to a service business — with dramatic results.

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The costs of ensuring good quality and recovering from poor quality have often been found to total 25 percent to 30 percent of sales revenue. No wonder cost of quality (COQ) programs are attractive to senior managers. Kaplan defines such a program in a manufacturing context as “a financial, systemwide measure of the costs associated with preventing, testing for, or correcting defective items.”1 A COQ program may address costs associated with training employees to avoid errors, inspecting products, remaking products, wasted materials, and lost business. There is no commonly accepted definition of accounts or an official program structure.

COQ programs are controversial. Some experts have called them “a useful tool” and others “a waste of time and money.”2 Quality gurus Juran and Crosby have popularized the quality cost concept, but Deming sees no value in financial measures related to quality (nor do the Japanese firms that support his philosophy).3 The key question is: Does COQ aid in the quality process? Both practitioners and academics are trying to answer this question.

At this point, there are few solid examples of firms that have successfully implemented and maintained a COQ program as prescribed by such agencies as the American Society for Quality Control (ASQC).4 In particular, there are few examples of sustained COQ programs that have... To read the complete article, login or sign-up using the form below.

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